nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒03‒06
seventeen papers chosen by
Martin Berka
University of Auckland

  1. Self-oriented monetary policy, global financial markets and excess volatility of international capital flows By Ryan Niladri Banerjee; Michael B Devereux; Giovanni Lombardo
  2. Explaining Foreign Holdings of Asia's Debt Securities: The Feldstein-Horioka Paradox Revisited By Horioka, Charles Yuji; Terada-Hagiwara, Akiko; Nomoto, Takaaki
  3. Destabilizing carry trades By Guillaume Plantin; Hyun Song Shin
  4. Aid, Remittances, and the Dutch Disease. By Richard Chisik; Nazanin Behzadan; Harun Onder; Apurva Sanghi
  5. The Case for Growth-Indexed Bonds in Advanced Economies Today By Olivier J. Blanchard; Paolo Mauro; Julien Acalin
  6. Real Exchange Rate Volatility: Is Sub-Saharan Africa Different? By Michael Bleaney; Manuela Francisco
  7. Did quantitative easing affect interest rates outside the US? New evidence based on interest tate differentials By Belke, Ansgar; Gros, Daniel; Osowski, Thomas
  8. Household Savings: A Survey of Recent Microeconomic Theory and Evidence By Andrew Coleman
  9. Limits to Arbitrage and Deviations from Covered Interest Rate Parity By James Pinnington; Maral Shamloo
  10. Is there a Case for Exchange Rate Coordination in South Asia? By Sengupta, Rajeswari; Sen Gupta, Abhijit
  11. A New Measure of the Canadian Effective Exchange Rate By Russell Barnett; Karyne B. Charbonneau; Guillaume Poulin-Bellisle
  12. Increasing Trends in the Excess Comovement of Commodity Prices By Kazuhiko Ohashi; Tatsuyoshi Okimoto
  13. International liquidity and the European sovereign debt crisis: Was euro area unconventional monetary policy successful? By Everett, Mary M.
  14. Recent Estimates of Exchange Rate Pass-Through to Import Prices in the Euro Area By Nidhaleddine Ben Cheikh; Christophe Rault
  15. An incomplete markets explanation of the UIP puzzle By Rabitsch, Katrin
  16. Exchange Rate Pass-Through in the Euro Area By Mirdala, Rajmund
  17. Cross-Country Exposures to the Swiss Franc By Agustín S. Bénétrix; Philip R. Lane

  1. By: Ryan Niladri Banerjee; Michael B Devereux; Giovanni Lombardo
    Abstract: This paper explores the nature of macroeconomic spillovers from advanced economies to emerging market economies (EMEs) and the consequences for independent use of monetary policy in EMEs. We first empirically document the effects of US monetary policy shocks on a sample group of EMEs. A contractionary monetary shock leads a retrenchment in EME capital flows, a fall in EME GDP, and an exchange rate depreciation. We construct a theoretical model which can help to account for these findings. In the model, macroeconomic spillovers are exacerbated by financial frictions. We assess the extent to which domestic monetary policy can mitigate the negative spillovers from foreign shocks. Absent financial frictions, international spillovers are minor, and an inflation targeting rule represents an effective policy for the EME. With frictions in financial intermediation, however, spillovers are substantially magnified, and an inflation targeting rule has little advantage over an exchange rate peg. However, an optimal monetary policy markedly improves on the performance of naive inflation targeting or an exchange rate peg. Furthermore, optimal policies don't need to be coordinated across countries. Under the specific set of assumptions maintained in our model, a non-cooperative, self-oriented optimal policy gives results very similar to those of a global cooperative optimal policy.
    Keywords: International spillovers, Local Projections, Capital flows, Financial intermediaries, Monetary policy
    Date: 2016–01
  2. By: Horioka, Charles Yuji; Terada-Hagiwara, Akiko; Nomoto, Takaaki
    Abstract: In this paper, we find that home bias is still present in all economies and regions, especially in the case of short-term debt securities, but that there are substantial variations among economies and regions in the strength of home bias, with the Eurozone economies, the US, and developing Asia showing relatively weak home bias and advanced Asia, especially Japan, showing relatively strong home bias. We then examine trends over time in foreign holdings of debt securities and find that capital has been flowing from the US and the Eurozone economies to both advanced Asia (especially Japan) and developing Asia and that foreign holdings of debt securities have been increasing in advanced as well as developing Asia but for different reasons. The main reason in the case of advanced Asia (especially Japan) appears to be higher risk-adjusted returns, whereas the main reason in the case of developing Asia appears to be the growth of debt securities markets combined with relatively weak home bias and (in the case of short-term securities) lower exchange rate volatility. Finally, we find that since the Global Financial Crisis, foreign holdings of debt securities have declined (i.e., that home bias has strengthened) in all economies and regions except developing Asia, where they have increased (except for a temporary decline in 2008) but where their share is still much lower than the optimal share warranted by the capital asset pricing market model.
    Keywords: Capital asset pricing model, cross-border portfolio investments, debt securities, Feldstein-Horioka paradox, Feldstein-Horioka puzzle, foreign debt holdings, Global Financial Crisis, government bonds, government securities, home bias, international capital flows, international capital mobility, international capital movements, safe haven, short-term capital movements, advanced Asia, developed Asia, developing Asia, non-Japan Asia, Eurozone, Japan
    JEL: F21 F32 F34 G01 G15 O53
    Date: 2015–11
  3. By: Guillaume Plantin; Hyun Song Shin
    Abstract: We offer a model of currency carry trades in which carry traders earn positive excess returns if they successfully coordinate on supplying excessive capital to a target economy. The interest-rate differential between their funding currency and the target currency is their coordination device. We solve for a unique equilibrium that exhibits the classic pattern of the carry-trade recipient currency appreciating for extended periods, punctuated by sharp falls.
    JEL: F3 G3
    Date: 2014–10–20
  4. By: Richard Chisik (Department of Economics, Ryerson University, Toronto, Canada); Nazanin Behzadan (Department of Economics, Ryerson University, Toronto, Canada); Harun Onder (The World Bank); Apurva Sanghi (The World Bank)
    Abstract: In this paper we show that an important determinant of a foreign transfer generating a Dutch disease effect is the income of the recipient. The marginal propensity to consume luxury services is larger for wealthier recipients who are more likely to receive the benefits of foreign aid than they are to receive remittances. In a three good model of international trade with production we show that foreign aid can generate a Dutch disease and remittances can foster economic growth. We empirically verify these hypotheses with data from two panels of data covering the years 1980-2009.
    Date: 2016–02
  5. By: Olivier J. Blanchard (Peterson Institute for International Economics); Paolo Mauro (Peterson Institute for International Economics); Julien Acalin (Peterson Institute for International Economics)
    Abstract: One of the legacies of the global financial crisis is a high ratio of public debt to GDP. While current levels may be sustainable, another series of bad shocks could easily tip the balance and lead to unsustainable debt ratios and to default. The quantitative exercises presented in this Policy Brief show that growth-indexed bonds can play an important role in that content. By decreasing payments when growth is low, they can substantially reduce the "tail risks" associated with explosive debt paths starting from today's high ratios. The introduction of growth-indexed bonds will benefit highly indebted advanced economies and, in the euro area, might provide a partial market-based solution to attain valuable insurance benefits well ahead of a formal fiscal union.
    Date: 2016–02
  6. By: Michael Bleaney (School of Economics, University of Nottingham); Manuela Francisco (World Bank, Washington DC, and NIPE, University of Minho)
    Abstract: Real effective exchange rate volatility is examined for 90 countries using monthly data for the period January 1990 to June 2006. Volatility increases with country size and the inflation rate, and is greater in developing countries. Volatility is particularly high in sub-Saharan Africa after controlling for these factors. Exchange rate regime effects, as identified by the IMF’s current de facto methodology, are significant. Free floats have higher volatility than other regimes, and crawling pegs/bands appear to be a form of real exchange rate targeting. The results are robust to alternative volatility measures.
    Keywords: Exchange rate regimes, inflation, volatility
    JEL: F31
    Date: 2016
  7. By: Belke, Ansgar; Gros, Daniel; Osowski, Thomas
    Abstract: This paper explores the effects of non-standard monetary policies on international yield relationships. Based on a descriptive analysis of international long-term yields, we find evidence that long-term rates have followed a global downward trend prior to as well as during the financial crisis. Comparing interest rate developments in the United States and the Eurozone, it appears difficult to find a distinct impact of the Fed's QE1 on US interest rates for which the global environment - the global downward trend in interest rates - does not account. Motivated by these results, we analyze the impact of the Fed's QE1 program on the stability of the US-Euro long-term interest rate relationship by using a CVAR and, in particular, recursive estimation methods. Using data between 2002 and 2014, we find limited evidence that QE1 caused a breakup or a destabilization of the transatlantic interest rate relationship. Taking global interest rate developments into account, we thus find no significant evidence that QE had an independent, distinct impact on US interest rates.
    Abstract: Der vorliegende Artikel untersucht die Auswirkungen unkonventioneller geldpolitischer Maßnahmen auf internationale Zinsbeziehungen. Aufbauend auf einer deskriptiven Analyse ergeben sich Hinweise, dass die weltweite Entwicklung der Langfristzinsen vor und während der Finanzkrise von einem globalen Abwärtstrend geprägt war. Unter Berücksichtigung dieser trendmäßigen Zinsreduktionen lässt sich im Rahmen eines Vergleichs der europäischen und amerikanischen Zinsentwicklungen kein separater Effekt des 'Quantitative Easings' der Federal Reserve auf den amerikanischen Zins erkennen. Ausgehend von diesem Ergebnis werden empirisch im Rahmen eines kointegrierten vektorautoregressiven Models ('CVAR') die Auswirkungen des 'QE1'- Programms auf die Stabilität der Beziehung zwischen europäischem und amerikanischem Langfristzins untersucht. Die Ergebnisse der Analyse generieren nur geringe Hinweise, dass 'QE1' zu einer Destabilisierung bzw. einem Zerfall der transatlantischen Zinsbeziehung geführt hat. In dieser Hinsicht ergeben sich keine signifikanten Hinweise darauf, dass das 'Quantitative Easing' der Federal Reserve einen unabhängigen bzw. separaten Einfluss auf den amerikanischen Langfristzins hatte.
    Keywords: quantitative easing,unconventional monetary policies,time series econometrics,Cointegrated VAR (CVAR),recursive methods
    JEL: C32 E43 E44 E58 F31 G01 G15
    Date: 2016
  8. By: Andrew Coleman (The Treasury)
    Abstract: This paper summarises recent theoretical and empirical developments in the vast literature that has examined the microeconomic determinants of household saving. It is designed as a primer to provide a basic understanding of some of the developments in the literature in the last decade. The paper uses the standard intertemporal optimising model as the basic organisational framework, and includes a discussion of precautionary savings, liquidity constraints and bequests. The empirical data is examined in light of this framework. Three key issues related to superannuation provision arise. First, evidence suggests that in most countries households continue to save after retirement. Second, in several countries there is evidence that most people hold very few financial assets at any stage of their lives, and a large number of people hold very few assets, either financial or real. Third, intergenerational transfers appear to provide a motive for the lack of consumption for many of the elderly, particularly the wealthy.
  9. By: James Pinnington; Maral Shamloo
    Abstract: We document an increase in deviations from short-term covered interest rate parity (CIP) in the first half of 2015. Since the Swiss National Bank’s (SNB) decision to abandon its minimum exchange rate policy, both the magnitude and volatility of deviations from CIP have increased across several currency pairs. The effect is particularly pronounced for pairs involving the Swiss franc. These deviations are distinct from those observed during the financial crisis. We argue that they are a consequence of reduced liquidity in foreign exchange markets, rather than imbalances in international funding markets. A reduction in the supply of forward contracts, owing to limited dealer capacity following the SNB decision, led to wide bid-ask spreads in the forward market. This friction, pertaining specifically to the foreign exchange market rather than broader funding markets, allowed deviations from CIP to persist.
    Keywords: Exchange rates, International financial markets
    JEL: F31 G15
    Date: 2016
  10. By: Sengupta, Rajeswari; Sen Gupta, Abhijit
    Abstract: This paper evaluates the case for greater exchange rate coordination in South Asia. With inter-regional integration in South Asia progressing at a faster pace than the region’s integration with the world as well as the economies of South Asia being buffeted by similar external shocks there is a need for greater exchange rate cooperation among the economies of the region, while retaining the flexibility to adjust to external currencies. Using empirical methods, we find limited evidence of co-movement of South Asian currencies in nominal terms, while the evidence for degree of co-movement is slightly stronger in real terms. Much of the divergence in the movement of currencies is derived from the varied exchange rates being pursued in these economies. While India has increasingly moved towards a more flexible exchange rate regime, Bangladesh, Pakistan and Sri Lanka, continue to remain pegged to US Dollar.
    Keywords: Exchange Rate Coordination, Panel Unit Root, Exchange Rate Regimes.
    JEL: F15 F36 F55
    Date: 2015–12–10
  11. By: Russell Barnett; Karyne B. Charbonneau; Guillaume Poulin-Bellisle
    Abstract: Canada’s international competitiveness has received increasing attention in recent years as exports have fallen short of expectations and Canada has lost market share. This paper asks whether the Bank of Canada’s current effective exchange rate measure, the CERI, is still an accurate measure of Canada’s international competitiveness. Overall, while the CERI represented an improvement over previous measures when it was introduced, we find that it has several drawbacks that make it less well suited to address current competitiveness issues. To address these deficiencies, we develop a new Canadian effective exchange rate (CEER) index using a methodology based on current international best practices. The new index includes a broader set of countries and uses annually updated competition-based weights. These weights account for both Canada’s bilateral trade with another country and the competition Canada faces from that country on a product-by-product basis in third markets. We find that the CEER has depreciated less than the CERI in recent years, reflecting the greater importance of third-market competition from emerging-market economies in the CEER. This could help explain why Canada’s share of the U.S. import market has continued to decline despite the recent large depreciation of the Canadian dollar against the currencies of a number of advanced economies.
    Keywords: Exchange rates, International topics
    JEL: F1 F31
    Date: 2016
  12. By: Kazuhiko Ohashi; Tatsuyoshi Okimoto
    Abstract: We investigate how the excess comovement of commodity prices, that is, the correlation in commodity returns after filtering out common fundamental shocks, has changed over the past three decades by developing the smooth-transition dynamic conditional correlation model that can capture long-run trends and short-run dynamics of correlation simultaneously. Using data from 1983 to 2011, we find that significant increasing longrun trends in excess comovement have appeared since around 2000. We confirm that these increasing trends are neither an artifact of the financial crisis after the bankruptcy of Lehman Brothers in September 2008 nor the time-varying sensitivities of commodity returns to common fundamental shocks. Moreover, we find that no significant increasing trends exist in the excess comovement among off-index commodities and that the surge of global demand alone cannot explain the increasing trends. These findings provide additional evidence for the timing and scope of the recent increasing commodity-return correlations that suggest the influence of the financialization of commodity markets starting around 2000.
    Keywords: excess comovement, commodity return, time-varying correlation, smooth transition, regime change, financialization
    JEL: C32 C51 G15
    Date: 2016–02
  13. By: Everett, Mary M.
    Abstract: Using novel data on individual euro area bank balance sheets this paper shows that exposure to stressed European sovereigns is associated with a contraction in international funding. The loan component of euro area bank asset portfolios is most adversely affected by this decline in international liquidity. Controlling for bank risk and credit demand, during the sovereign debt crisis credit supply to households declined less for non-stressed country banks, with relatively greater exposure to stressed sovereigns, and that accessed the ECB's unconventional monetary policy measures in the form of the first 3-year Long-Term Refinancing Operations (VLTROs) in December 2011. In contrast, the VLTROs in February 2012 were not effective in mitigating the effect of the European sovereign debt crisis on private non-financial sector credit supply.
    Keywords: European sovereign crisis, cross-border banking, international shock transmission, unconventional monetary policy, ECB liquidity
    JEL: G21 G15 H63
    Date: 2015–06
  14. By: Nidhaleddine Ben Cheikh (ESSCA - Ecole Supérieure des Sciences Commerciales d'Angers - ESSCA); Christophe Rault (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper provides an update on the exchange rate pass-through (ERPT) estimates for 12 euro area (EA) countries. First, based on quarterly data over the 1990-2012 period, our study does not find a significant heterogeneity in the degree of pass-through across the monetary union members, in contrast to previous empirical studies. As we use a longer time span for the post-EA era than existing studies, this is not surprising, since the process of monetary union has entailed some convergence towards more stable macroeconomic conditions across EA member states. Second, when assessing the stability of pass-through elasticities, we find very weak evidence of a decline around the inception of the euro in 1999. However, our results reveal that a downtrend in ERPT estimates became apparent starting from the beginning of the 1990s. This observed decline was synchronous to the shift towards reduced inflation regimes in our sample of countries. Finally, we notice that the distinction between “peripheral” and “core” EA economies in terms of pass-through has significantly decreased over the last two decades.
    Abstract: Dans ce papier, nous étudions le niveau de rapprochement des économies du Maghreb vers les économies de l’Europe de l’Ouest. Nous faisons également une comparaison avec le niveau de convergence des Pays d’Europe Centrale et Orientale PECO-5 vers les pays de la zone euro. Pour ce faire, nous utilisons une modélisation VAR Structurelle pour l’identification des chocs d’offre et des chocs de demande. Nous faisons également appel à l’Analyse en composante Principale ACP dans l’étude de la dynamique de convergence. Nos résultats montrent un niveau différencié de rapprochement des économies des pays du Maghreb vers l’Europe : la Tunisie et le Maroc dans une moindre mesure, sont sur le sentier de la convergence et à un niveau qui se rapproche de celui des PECO-5 ; l’Algérie et la Libye restent très éloignés de la convergence en dépit de leur capacités. Ce résultat confirme le rôle important joué par le commerce bilatéral et plus particulièrement celui des produits manufacturés. La convergence de la Tunisie et du Maroc est également le fruit d’une dé-spécialisation de production des secteurs agroalimentaire et textile vers des secteurs moyennement et hautement technologiques.
    Keywords: Exchange rate pass-through, Import prices, Euro area,Transmission des variations des taux de change, prix à l'importation, zone euro
    Date: 2015
  15. By: Rabitsch, Katrin
    Abstract: A large literature attributes failure of uncovered interest rate parity (UIP) to the existence of a timevarying risk premium. This paper presents a mechanism in a simple two-country two-good endowment economy with incomplete markets that generates sizeable deviations from UIP. In a parameterization where international wealth effects are important, liquidity constraints on an internationally traded bond and agents' strong resulting precautionary motives successfully generates a time-varying risk premium: countries that have accumulated large outstanding external positions have, being closer to the constraints, stronger precautionary motives and their asset carries a risk premium.
    Keywords: Uncovered Interest Rate Parity,Incomplete Markets Precautionary Savings,Time-Varying Risk Premium
    JEL: F31 F41 G12 G15
    Date: 2016
  16. By: Mirdala, Rajmund
    Abstract: Time-varying exchange rate pass-through effects to domestic prices under fixed euro exchange rate perspective represent one of the most challenging implications of the common currency. The problem is even more crucial when examining crisis related redistributive effects associated with relative price changes. The degree of the exchange rate pass-through to domestic prices reveals its role as the external price shocks absorber especially in the situation when the leading path of exchange rates is less vulnerable to the changes in the foreign prices. Adjustments in domestic prices followed by exchange rate shifts induced by sudden external price shocks are associated with changes in the relative competitiveness among member countries of the currency area. In the paper we examine exchange rate pass-through to domestic prices in the Euro Area member countries to examine crucial implications of the nominal exchange rate rigidity. Our results indicate that absorption capabilities of nominal effective exchange rates clearly differ in individual countries. As a result, an increased exposure of domestic prices to the external price shocks in some countries represents a substantial trade-off of the nominal exchange rate stability.
    Keywords: exchange rate pass-through, inflation, Euro Area, VAR, impulse-response function
    JEL: C32 E31 F41
    Date: 2015–06
  17. By: Agustín S. Bénétrix (Department of Economics, Trinity College Dublin); Philip R. Lane (Central Bank of Ireland, Trinity College Dublin and CEPR)
    Abstract: This paper first documents the foreign currency exposures of Switzerland in the 2002-2012 period. We find that the large scale of the Swiss international balance sheet means that movements in the Swiss Franc generate large cross-border valuation effects. Second, we examine the Swiss Franc holdings of the rest of the world and highlight differences in exposures between advanced and emerging economies.

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